Yuan devaluation key step toward market-based rate

BEIJING -- China's recent decision to devalue the yuan against the dollar marks an important step toward allowing markets to play a greater role in determining exchange rates, says Hu Bin of the Institute of Finance and Banking at the Chinese Academy of Social Sciences.

Hu Bin of the Institute of Finance and Banking at the Chinese Academy of Social Sciences.

Hu, a legal and financial scholar who came to Japan in 2014, has studied such topics as the role of policy-based finance. Excerpts from his interview with The Nikkei follow.

Q: China has lowered the yuan's reference rate significantly.

A: It'll be a plus for exports. But the reference rate was far from actual market conditions. By correcting that gap, this move was an important step toward a more market-based exchange rate system.

[China] needs to be careful to properly protect against risk. It has to watch to ensure there are no unusual movements in the flow of capital to and from foreign destinations. The yuan's trading band will probably be widened in the future as well.

Q: What lessons has China learned from the bursting of its stock bubble?

A: China had little experience with markets that have become highly leveraged through margin lending. The steep rise in prices was also speculative. The recent market correction is its tuition.

Q: Some worry there will be a negative effect on the real economy.

A: China's economy is large, so it shouldn't suffer much of a shock from the rapid drop in share prices. The impact on investor sentiment is a concern. Because China's economy is supported by a variety of financing routes aside from bank lending, [the bursting of the bubble] will have a negative impact by making corporate fundraising through the stock market tougher.

Q: In the first half of this year, the finance industry pushed up growth amid a sharp rise in stock trading. Won't this special effect drop off in the latter half of the year?

A: I completely agree, but when the Politburo discussed policy management for the second half of the year at a meeting in late July, they advocated for the two points of stable growth and risk prevention. Money has been put toward infrastructure construction in outlying areas, so reaching the growth target of around 7% for the full year won't be a concern.

Q: What are the risks facing the Chinese economy?

A: Overcapacity and weak exports could worsen companies' finances, potentially increasing banks' bad loans. There are risks in online lending, like peer-to-peer lending, where individuals and small and midsize companies get financing over the Internet. [China] needs to strengthen management and supervision while also supporting the real economy through financing.

Q: How long do you think the steps to shore up the stock market will continue?

A: They're emergency measures. They don't mean the Chinese government is interfering excessively in the market. They'll become unnecessary once investor sentiment recovers, but investor sentiment is still fragile.